For financial professionals in Belgium

Market GPS 2023: Finding the silver lining

Investors will continue to grapple with market shocks in 2023, but it’s time to focus on the silver lining. In our Market GPS webcast, Janus Henderson’s asset class experts share their perspectives on the economic outlook and discuss the risks and opportunities facing investors in the year ahead.

WEBCAST: Market GPS 2023: Finding the silver lining

Jim Cielinski, CFA

Jim Cielinski, CFA

Global Head of Fixed Income

Jeremiah Buckley, CFA

Jeremiah Buckley, CFA

Portfolio Manager

Steve Cain

Steve Cain

Portfolio Manager

Adam Hetts, CFA

Adam Hetts, CFA

Global Head of Portfolio Construction and Strategy

26 Jan 2023
45 minute watch

Key takeaways:

  • Inflation remains pivotal: How will it impact asset classes and how should investment approaches adjust accordingly?
  • Diversification dynamics: Stock and bond correlations soared last year; will these retrace, and where should investors look for diversification in 2023?
  • Slowdown preparations: When heading into a global slowdown, where caninvestors look for attractive returns?

Thank you for joining today’s webcast, “Market GPS 2023, Finding the Silver Lining,” hosted by Janus Henderson Investors. I will now turn it over to Global Head of Portfolio Construction and Strategy, Adam Hetts.

Adam Hetts: Thank you. Welcome everybody to our podcast, our webcast. We have all been dealing with a chaotic market, and we think the most important task for investors right now is to find the silver lining from all this volatility. And that is, of course, easier said than done. So we are excited to help with this Market GPS webcast. We will go through our outlook on global markets and we will cover the gamut across inflation, rates, and valuations, and then I will start bringing in whatever questions you all send me as listeners.

To help me with all of this, I am glad to be joined by our three panelists. We have Jim Cielinski, our Global Head of Fixed Income joining from London. And we have Steve Cain, Co-Head and Portfolio Manager on our Diversified Alternatives Team. And then we have Jeremiah Buckley, Portfolio Manager. And both Steve and Jeremiah are here with me in Denver. So first, I think most importantly let’s cover off inflation, and that was sort of the megatrend or mega-shock last year. And you all are welcome to go on record and make predictions, but I think most important for our listeners is hearing about how you think inflation is evolving this year compared to last year and how it will affect you differently this year compared to last year. And then the biggest impact – inflation uncertainty – is still having on the markets that you focus on. So Jim, if you could please, we will start with you over in London.

Jim Cielinski: Yes, and it was inflation, inflation, inflation last year. I don’t know that that changes near term, but when I think about how to look at it, it is important to realize that markets respond to inflection points. And we have seen the change in inflation already; I think it is falling. If you look at the annualized rate of inflation this year, we are looking at about 3%. I think year-to-date it’s about 3.1, in core, for example. Don’t look at the year-on-year comparisons, that would be my advice. If you want to know what drives markets, look at what things are doing today, ask if that will persist. Yes, by year end, inflation will be dramatically lower. My case is that it is already a lot lower today. So, still sticky in spots, I think that is the risk, but the underlying inflation rate as bottlenecks disappear, I think as some of the pressures wane, and the extreme kind of reopening shock of COVID dissipates, Adam, I think it continues to be a key. The other thing I’d probably foreshadow, though, is inflation being so topical and on the front of everybody’s mind, I think, as the driver of markets, I think you start to get such a fixation that the narrative that can shift, but small moves, say, in the inflation data, can overwhelm what is often happening in the background. And I would also worry about that happening this year. We get so excited by a good inflation print [that] we will be likely fearful of a bad inflation print. You know, keep an eye on what else is happening, because I think the narrative on inflation because it has been so in front of us all year, and we have been so wrong as a market, I think that narrative shifting may be overshadowing some other important developments in the economy, geopolitics, and other places.

Hetts: Thanks, Jim. I think an important read-through of the answer there is that we are over the initial shock of inflation and it’s still creating a lot of volatility, but maybe we are past the most uncertain stage of all this inflation news. So, Jeremiah, what is your take?

Jeremiah Buckley: Yes, I think inflation is going to have less of an impact here in 2023. I think a lot of, as Jim noted, a lot of the leading indicators are showing that we are past the peak. We are seeing the moderation. I think the forward outlook is also improving. We have seen commodity prices stabilize and in some cases come down. We have seen housing and rent prices come down. Obviously, that has a lag that will filter into the government reported statistics. You know, the tricky spot is still labor. We are still in a tight labor market but, given the increased number of layoffs that we have seen – you saw Microsoft with 10,000 people this morning – we think that the job market is loosening up and that, going forward, and the impact on services, that will moderate as well. So I think the focus will shift away from inflation as we continue to see kind of slow, but maybe bumpy progress. It will be more of a focus on how the increase in fed funds and all the work that central banks have done, how much does that really materially impact the economy. I think that will be more of the focus going forward. I think one of the lessons that we learned in 2022 is, when doing company research, focusing on companies that have that pricing power, that have that ability to recover margins when they are seeing this type of inflation. And so that’s the type of companies we think they’ll benefit as some of those inflation metrics like transportation costs and supply chain costs come down, they’ll see their margins recovering.

Hetts: Thanks. Steve, what’s your take?

Steve Cain: Well, I think we’ve gone through what could possibly be termed the most anticipated bear market in history in ’22, and perhaps we’re approaching the most anticipated recession in history. Everybody’s pretty focused on declining inflation, softening employment numbers. So, to the extent that we believe in efficient markets – and by gum, they’re not always efficient – one should maybe be thinking [about] what can go wrong with that scenario. Where are we in that recession? Can we in fact not go into a recession? Is it possible that employment in the U.S. stays more robust even than it appears to be currently? Is it that inflation actually finds a base higher than the Fed’s target rate of 3%? I’m sure that we will undershoot that at some point during the year just from a statistical perspective. But I still look and try to focus on the supply side of the economy. I think we’ve learned over the last 10 years that aggregate demand is easily manipulated by the Federal Reserve and by fiscal policy. We saw how quickly that can happen in 2020 in a shock. But supply side is much more difficult to move and much more difficult to impact in the short run. As the world splits into, essentially, two trading blocks, and that’s true to a lesser extent maybe than the news portrays, but as we see certain sectors of the economy start to split into two sections of China and the United States, I think that transition period is going to create a lot of supply shock, and I continue to believe that that supply shock will feed through to prices being more resilient than maybe the market is pricing right now. So, the key question for me is, does inflation inflect at 2%, 1%, or 3%? Do we require the Fed to keep going? We still have negative real rates; we’ve never got to positive real rates in the United States through this entire cycle. So, it’s still quite stimulative on that basis. We’ve never seen a recession started or inflation be controlled with negative real rates in history. So, whilst recession seems obvious, I just make the question: Is it as obvious as it looks?

Hetts: So, maybe some different, more persistent sources of inflation than what we were dealing with last year?

Cain: Right. Particularly around commodities, around, as China opens back up, we’re seeing energy inflect. We’ve had a very mild winter. It’s thrown a blanket over the expectations that we all came into this winter with, that Europe would suffer from it. And obviously, high energy prices, and even in the United States where we were paying $5 or $6 for gas, those things have all reverted and it’s really a consequence of a very mild winter and lack of energy demand across the Western economies. Let’s remember that weather is weather; it’s not climate, weather is hard to anticipate. I don’t think anyone saw this coming. And we’re seeing, particularly in – certainly Jeremiah knows much more about the stocks than I do – but in the energy complex we saw no retreat back from energy stocks as a consequence of what I assume stock buyers are saying must be very temporary, otherwise we would’ve seen more of a reaction.

Hetts: Thanks. So then, past inflation, we’ll move onto interest rates, one of the other most profound drivers of what we’ve been living through the last year or so. So, I’ll start with a quote from Warren Buffet – a pretty good investor, even though he doesn’t work here, but still, pretty good. Warren Buffet said that “interest rates are like gravity to all asset prices.” So, let’s just talk about what that gravity is feeling like right now. Jim, can you talk about your base case for the U.S. 10-year yield this year? And then, I’m just going to take a guess that maybe you’re a bit optimistic on rates going into this year. So then, what would also be the bear case? If we have inflation surprises, other bad news, what’s sort of the upper limit or ceiling on U.S. tenure rates that you’d picture?

Cielinski: Look, I think I am optimistic on bonds, but they’ve rallied a lot already. And I think, to Steve’s point, you have to ask what’s priced in. I think bonds rallied because we have a slowdown and because inflation has peaked and will come off. Most of the world now thinks that, by the way. And so, if you look at, say, where our 10-year Treasury is – let’s say 3.5 – if inflation kind of comes down to the threes. And my point earlier, by the way, is look at the monthly prints; inflation is kind of in the threes already, but that doesn’t leave a massive amount of room for bonds to rally from here before they start look overvalued, before real rates get negative. And so, I wouldn’t anticipate a massive year for bonds, but I think they rally, and I think they provide good capital returns in parts of the bond market because there’s additional spread, they should actually be quite attractive. So, that would be my base case, look for a rally. Don’t look for anything like the yields we saw a year and a half ago, which I don’t expect to see again in my lifetime. I think that was an experiment and an experiment gone wrong in many ways. So, what about the bear case? I think that’s if inflation proves too sticky and the economy itself is more robust than we think. But again, I think you’d see a fairly strong policy reaction that would push short-term rates up. If we continue to get inflation wrong, and deeply wrong, in the year ahead, it really points to models that are severely off-base. It will lead to no confidence or credibility with central banks, and they’re going to have to tighten to a point that just causes something to really break. And with that, I don’t think 10-year yields, for example, have to go much above, say, 4.5, Adam. So I think they can be better defined and in a range as we move forward. Even with inflation much higher and with us dead wrong, I don’t see a huge amount of downside, either. So, you know, plenty to kind of keep an eye on, though. And again, I think bonds are in such a better place than they’ve been in the last five to 10 years, and that’s because the starting point is just so dramatically different – and better – for investors than it has been.

Hetts: And then, a quick follow-up: Outside of U.S. yields, how do you picture ex-U.S. yields? What’s the trajectory there? Safe to say it’s going to follow a similar path, maybe on a bit of a lag, or a bit different?

Cielinski: Well, I think, for me, EMD probably leads. They were held hostage to what the Fed was doing. The dollar was soaring through last year. I think they can be the first to ease and probably see rates kind of come back lower, and I think we’ve seen some of that. As you say, the U.S. might be next, and then I think Europe probably follows that, and that’s kind of the pattern that we have been looking at. I think it is a global phenomenon, so I think it happens everywhere. Japan’s always a little bit of an outlier to try to figure out what is happening there. But yeah, I would go EMD, and then U.S. as kind of the next place to see the rally, then Europe, and then Japan’s a little bit idiosyncratic.

Hetts: Thanks. So then, Jeremiah, if Jim’s talking about us coming into this year being in a structurally different place on interest rates and not seeing the rates from a year and a half ago ever again in his lifetime, then thinking about putting this to work in a balanced 60/40 kind of portfolio. So then, last year after rates skyrocketed, stocks and bonds, obviously, slowed off at the same time, correlations spiked and basically went to one, are you seeing anything yet that’s giving you confidence that the 40 will diversify the 60 again and the 60 portfolio’s not dead after all?

Jeremiah Buckley: Yeah. So, I think, obviously, last year was a difficult year with both asset classes depreciating and not providing that balance that we’ve come to know and expect in the past. And so I think, given the level of rates, as Jim talked about, I think we’re in a much better spot for that ballast from fixed income to show itself. Particularly if we go into this period where we’re in a protracted demand slowdown, or a hard-landing type scenario, I think fixed income will provide that ballast and the negative correlation that we’ve seen historically. However, the supply side is so important as well. And so, to the extent that we get supply side improvement, whether that be labor or through supply chains loosening up, that could be good for both asset classes as inflation expectations come down, the central banks have to be less aggressive, and I think that’s obviously good for fixed income, but I also think it’s going to be good for equities. And so, in a positive scenario where, again, the supply side kind of reacts and we see labor markets loosening and we saw some of the labor shortages, I think that could be good for both asset classes, and they’ll be positively correlated in a positive way. However, given where rates are today, if we are in that surprising kind of demand-shock scenario, I think that will be, obviously, more negative for equities but positive for fixed income. So, I think the asset classes are set up to behave more like we would expect them to kind of going forward, and I disagree with the premature death of 60/40 strategies.

Hetts: So, 60/40 lives on. Steve, how about you? As an alternatives manager, if listeners are still concerned about stock/bond correlations or that classic long-only 60/40, then what should they expect out of alternatives in this kind of environment?

Steve Cain: First of all, I think we’re in Goldilocks 60/40; I think the sort of core probability is that both sides of that portfolio look fantastic, certainly more attractive than they have in the last number of years. So, 60/40 looks great for now. I’m not sure that the correlation will reset itself in quite the same way as we’ve seen historically. So, from a portfolio construction perspective, I’m not sure that 60/40 is maybe the right balance, and I think there’s a role to play for alternative there. And I use the word “alternatives” to mean things with no correlation to those two asset classes. So, you’ve got to be confident in sourcing your returns in places which don’t correlate with the baiter in that portfolio. You know, my sort of base case is that 40/40/20 now looks more attractive, where 20 is those alternative sources of return. But I think one has to be careful that those alternatives truly are uncorrelated. So, when one thinks about things like private equity, not necessarily clear that their sources of return are uncorrelated, it’s just their sources of reporting are uncorrelated, and I’m not sure that’s the same thing ultimately.

Hetts: So that illiquidity, which has been called illiquidity premium, or at worst volatility laundering, is there a role for that in alternatives? Or how do you think about when illiquidity is productive versus maybe just disguising that beta or correlation?

Cain: That’s a tough question. From a private equity perspective, I think often leverage and liquidity are mistaken for alpha, and one has to be very careful that the ability to not mark that to market disguises what actually is a broken process. I think that’s more important in private equity, where there’s a lot more leverage embedded and where we’re not seeing what would appear appropriate moves in holding prices given the move in rates that we’ve gone through. Now, clearly, it’s much easier not to have to take losses if one doesn’t have to, particularly if they’re temporary, but I still think that volatility laundering is not the appropriate way to manage a portfolio.

Hetts: So then, when you’re going back the 60/40, talking about the role of alternatives at 20%, you said 40/40/20. So, you’re essentially funding from equities in that construct.

Cain: That would be my base case. And let me just justify that in the sense that I think equities are in a range for the next 12 to 18 months, with the Fed, will be uncomfortable as the economy relaxes. I think you’ll see more Fed action as the S&P, for example, trades up through 42, 44, 4,500, and will be reactive. On the downside, I think valuations – again, I defer to Jeremiah with more knowledge of that – 3,500 forming a base. And therefore, if we’re in a range, volatility declines, the return attractiveness of equities relative to fixed income here is probably temporary shifted a little bit.

Hetts: Thanks. So then, let’s stick with that, Jeremiah. So, S&P valuations, can you just kind of set the table for us, your view on valuations in the S&P and earnings going into this year?

Buckley: So, I think we’re in a reasonable range on valuations now. Obviously, going into the beginning of 2022, expectations were for substantial earnings recovery as the economies opened up, but unfortunately inflation took a bite out of that and we saw earnings estimates come down, and then with interest rates going up, we saw equity multiples also impacted. And so, I think now looking at where we’re at, I think the valuation range is now reasonable for equities. I think we’re getting a 5.5% type earnings yield on the S&P 500 right now. We think that a mild recession is priced into the equity market, and getting into earnings forecast, we’ve seen earnings estimates for 2023 and 2024 come down to what we think is a reasonable level. And so, given our view that valuations are reasonable, our focus is really on the “E” part and making sure that what the central banks have done and the lag impact of those interest rate increases, we’re trying to make sure that we feel comfortable that that “E” is still appropriate, and if that “E” is appropriate and we start to look at 2024 when we’re in a more, hopefully, normalized environment with modest movements in interest rates, we think we can get back to a more constructive earnings growth environment. And so, as the equity market starts to look at 2024, we can see upside to that over time. And so, I think what we’re going to see is, you saw a number of industries in 2022 that would argue that they were already in a recession, that they had material impact to their business, whether it be autos, or PC manufacturers, semiconductor companies, retailers… And so, some of those companies will start to benefit and they’ll see earnings growth as they go against some of those difficult comparisons and the inventory adjustments that had to be taken. And so, we see certain areas of the market where there will be earnings growth in 2023 offsetting some of the other areas that might see some modest declines as we get into this slower macro environment.

Hetts: Thanks, that makes sense. Originally you were talking about 2024 being the earnings growth, but I think you’re making the point it’s not just muddling through 2023 because some sectors, some companies, really experienced those headwinds a lot more abruptly last year and might already be on the recovery this year.

Buckley: Yeah, I don’t think it’s going to be consistent across all sectors in 2023. I think we’re going to have some sectors with earnings up and some sectors with earnings down. And so, as a whole, I think we’ll see modest earnings growth, that’s our base case as of right now, and then, hopefully, that builds into 2024 and we see an acceleration to that.

Hetts: Thanks. Laying out some bright spots there. If in aggregate, Steve, if we’re talking about flattish valuations and modest earnings growth in 2023, thinking more globally outside the U.S., what type of equity alternative strategies can take advantage of this flattish environment? Or even in a larger sense, where are you seeing equity opportunities outside of what Jeremiah just laid out?

Cain: Well, we are very much not focused on beta, so, you know, looking for things, risk premia, that can be exploited in different places. So, where have risk premia widened most dramatically? I think one area of focus has been converts. Converts suffered, from an investing perspective, a period of rich valuations driven particularly by the participation of the last five years in long-only funds, retail have been big holders of converts. Over the last 18 months we’ve seen a lot of liquidations from those portfolios, which have driven valuations back into attractive range. Just from just an outright perspective, I think it sits uncomfortably between the fixed income investor and the equity investor, and therefore doesn’t maybe get the amount of attention. But I do think converts look very attractive. We will see balance sheet rebuilding as we go into the next 18 months. The opportunity to finance, we’ve seen very quiet capital markets, which you’ve seen the consequence of that through Goldman and Morgan Stanley’s earnings numbers, and I would expect to see that pick up. And those premiums, again, tend to be quite attractive, particularly at the beginning of that capital market cycle, there has to be fatter profits left on the table for investors when you first start that cycle, so we think they’ll be attractive opportunities in that space, too.

Hetts: Thanks. And then, Jim, back to you. So, maybe a rough analog to equity valuations, talk about credit spreads for a minute. So, how do you feel about the outlook of credit if we are facing this slowdown or even recession? So, I think particularly, are yields high enough right now in high yield that they could offset losses from spread widening in that slowdown recession environment? What’s the general view on credit?

Cielinski: Yield spreads are high enough for a soft landing, to be sure, Adam, and I think that’s really what it comes down to is, do you buy into the hard landing or soft landing? This is a unique period for credit, as Jeremiah was alluding to. We’ve got to remember that credit is denominated in nominal terms; that’s how companies borrow. And so, inflation isn’t all bad. You’re paying back less in real terms if you’ve borrowed and inflation goes higher. So, if earnings and cash flow can go up more than the rate of inflation, and you’re indebted, you end up actually in a better spot. So, the key is picking companies that will benefit from that, but also recognizing that when you start from a good place like most companies did, and you have this kind of inflation dynamic, which is a mixed picture, the outlook for the defaults is not as bad as it’s been in any recession that I can remember. And so if, say, you get a mild recession, defaults might go to, say, 6%, you typically recover half, or let’s say you recover half of that, and default losses are therefore 3. With current spreads in high yield – for example, I’d say 4 to 4.5 – you’re compensated for default losses. And so, if you get any kind of better outcome than that, I think credit is a reasonable place to be. But if you get a more drawn-out hard landing, the lesson in history has been that markets don’t price to simple default losses, they tend to price to 2x or 2.5x what default losses are. They overcompensate by the time you get to the bottom of a recession. So, you should not be complacent, I think, going into a slowdown. For that reason, we’re still a little bit cautious on high yield. Probably feeling a little bit better about investment grade, given that all end yields, with both rates and spreads moving higher, I think give you a much better starting point. But credit, you know, despite all the talk of a hard landing, it really has to be a hard landing and not just a mild recession, I think, to make credit unattractive.

Hetts: Thanks. So, reading through that answer a little bit more, if you’re warning about not being complacent going into the slowdown and still being a bit cautious on high yield, but with yields being so high, any insight for listeners thinking about, if they’re also feeling similarly torn, how do you get exposure to those high yields without just … it sounds like you shouldn’t just be hugging a high yield benchmark right now, or not quite yet?

Cielinski: I think every market has its places, like Steve was referring to with converts. Things like mortgages and asset backs and CLOs do look a little bit detached from the underlying leverage fundamentals. So, these were entities that, quite often, didn’t lever up as much. They sold off a lot on liquidity concerns in the last year, year and a half. I think those are better positioned for an economic slowdown. If you think, like I do, the liquidity trade is kind of behind us, now it’s more of a fundamental trade, I think owning those asset classes looks attractive. EMD [emerging market debt], again, kind of the first to teeter, as we started talking about high inflation and central bank tightening, could be the first to benefit if we reverse that. So, look, I think diversification is important. Adam, don’t lose sight of the fact that we have, as a market, not been great at predicting things like inflation. So, diversify; don’t put all your eggs in one basket. I think high yields are available in a lot of different places and I think to mix it up a bit and include those other asset classes and don’t be overly myopic just around places like high yield.

Hetts: Thanks, Jim. And I think an important note for the audience is that you mentioned securitized markets and emerging debt as some other opportunities to diversify and access some of those higher yields. You mentioned MBS, that’s a big part of traditional core benchmarks, but CLOs, ABS, other securitized markets aren’t broadly represented in traditional benchmarks. There’s a little bit more work involved in getting that diversification, to keep in mind.

Cielinski: Yeah, absolutely.

Hetts: Thanks. So then, I think we’ve kind of danced around this a little bit, but we want to be, I think, purely pessimistic for a minute and just talk about the single major shock or catalyst, if I can tie you just to one, that you’re most worried about in 2023. I think we’ve laid out a reasonably optimistic case and, talking about some rangebound markets, I think in a good way compared to last year. But if you had to be purely pessimistic, Steve, we’ll start with you, what would you pick? What’s in the back of your mind or the front of your mind?

Cain: I’m definitely the most pessimistic person. I consider my role within our team as being the guy that looks for what’s going wrong all the time, what can go wrong. So, I could make a strong case that we’re already in World War III and that it’s simply not the sort of kinetic war that we’re used to. Obviously, it’s a kinetic war in parts of Europe. I think the consequences of that conflict are still to be felt, particularly in the West where it feels like it doesn’t really affect us very much. Even more so in the U.S. than, obviously, in Europe, where you’ve seen energy spikes. And further escalation of that conflict can have some dramatic impacts on us from a supply chain perspective, from a cybersecurity perspective, from a functioning market perspective. There are lots of things that can go wrong without us every entering a kinetic war. And I don’t for a minute expect us to enter a kinetic war with Russia, but this undeclared, low profile can certainly get warmer and hotter and make us more uncomfortable in the way we operate.

Cain: Thanks, Steve. I started with you for a reason, and you didn’t disappoint with World War III. So, you set a pretty high bar. So, Jim, you can go next.

Cielinski: It’s normally the bond person that stands out on the pessimist questions, but I actually do think, though, geopolitical risks are big. I think some of those, too, are taking shape in the way that global trade flows and how it’s kind of redefining where the power bases are globally … a lot more of that to come. But I view that as one risk. I think that’s more the kind of the black swan or tail risk. I think the thing that worries me near term probably would just have to be, again, that we’re wrong on inflation. I’m shocked by how persistent the view is that inflation is always going to 2%. If we’re under that, it’s going up to 2, and ever since it’s been above, it’s always been going down to 2. Central bank models haven’t worked very well, so if we get services inflation continuing to move higher – labor markets are tight, as we said – if we get a lot of wage pressure, service inflation, it almost dictates that policy response isn’t over-tightened, and then I think kind of all bets are off and markets will be much more chaotic. So, again, I think inflation is in a good spot, but we should recognize that a lot on the policy response function, which is what is driving markets right now, will be upended if we’re wrong again there.

Hetts: Thanks, Jim. So, Jeremiah, before we get to you, just on the geopolitical risk, since you both mentioned that, I’m going to go a little bit further off script, which is dangerous, this is a live webinar, but I think if I’m a listener, I’m hearing about geopolitical risk, it just feels binary, like there’s no preparing for that. This can go to any of the three of you, what does, I wouldn’t say a “playbook” look like for World War III, but if that becomes an increasing risk you’re more concerned about, what type of positioning listeners should start thinking about if that starts to get hotter, as you put it?

Cain: So, volatility exposures across different asset classes; we’ve certainly seen equity volatility decline dramatically last year, again, because maybe, I think the driver of that was it was the most anticipated bear market in history, and with the lack of bond protection given the level of low rates, you really only had one place to hedge, which was equity volatility, equity perks. Now, we’re in a slightly different world. Equity vol as measured by the VIX, which is a poor measurement, is up 20. The opportunity for hedging within the equity volatility space has reasserted itself. We’re seeing currency markets start to react in a much more volatile way. We’re seeing far bigger movements than we’ve been used to certainly in the last decade. So I think currency markets are an interesting place to seek hedges. And fixed income, I would say quite the opposite – that feels like a market where volatility should decline as we start to coalesce around a lower inflation path, even if it’s a bumpy one, the extent to which fixed income volatility made dramatic moves last year, I think that those should modulate as we go through the year in equity space and potentially in currency space, where I think there’s still a lot of movement to happen.

Hetts: I’ll bite on VIX. Why is VIX a poor measurement?

Cain: Just because it’s very short-term. If you want to take proper hedging, you’re going to look out along the volatility surface.

Hetts: So, Jeremiah, geopolitical or not?

Buckley: Yeah, so, maybe two answers to that. One, I think, in this demand shock of a very intense geopolitical situation, I think fixed income does better and I think the importance of 60/40 and that negative correlation between the two asset classes that we’ve seen historically really shines in that type of scenario. I think within the equity portfolio, to the extent that we get increasingly concerned about that type of environment, we become more conservative, focus on companies with very healthy balance sheets that can ride out volatility, who can potentially take share from companies that are weaker that wouldn’t potentially thrive in that type of scenario. And going back to the original question about kind of biggest concerns, the biggest frustration for me in 2022 has been just this labor supply issue and the lack of recovery in labor participation, which has put so much pressure on wages, which then filters into services. And if we can’t figure that out, if we can’t keep making progress and find adequate labor supply to help grow the economy, both in the U.S. and globally, that’s going to be an issue because this wage/price spiral that leads to central banks becoming even more restrictive is not a great scenario for risk assets. And so, that’s something we need to figure out and hopefully over time that will improve. The bright side of that is, I think, there’s a lot of investment going on in technology and automation that will help ease the need for labor as a key kind of component to growing economies over time. But that’s going to take time to develop and it’s not the short-term solution. So, we need both some improvement in labor participation and then that continued investment to ease the requirements of labor as a component to economic growth going forward.

Hetts: Thanks. And while I’ve got you on U.S. equities, audience question came in about growth versus value in 2023, which will be the winner?

Buckley: Yeah. So, I think our base case is that 2023 is going to be less thematic. I think we’re getting to an area where central banks are closer to being done with what they’re doing than they were in 2022. And so I think a lot of that aggressive central bank tightening drove a lot of the themes in 2022 and I think 2023 is going to be more about company-specific fundamentals. Who is able to get greater labor productivity? Who is able to shore up their supply chain such that they’re more efficient, they don’t have excess inventories? And so, we think it’s going to be more company specific. Certainly, we’re focused on the different industries. The tricky part of growth versus value is the composition of those indices changes over time. I think in 2023 we’re going to see energy have a greater presence in growth indices and less in value, and so it’ll depend on kind of how that shapes up. But as we focus on various industries, we’re looking at the fundamentals in each. But again, I think it’s going to be less thematic and more company execution that’s going to drive performance in 2023.

Hetts: Yeah, it feels like, looking at U.S. equities this year, it’s more profound than just value or growth, or even sectors; it’s looking at stable earnings that are already recovering quality in that kind of sense and kind of getting underneath the surface at the micro level compared to the macro themes we have.

Buckley: I think so.

Hetts: So then, a couple other audience questions, and then I’ll think we’ll wrap up in a few minutes here. So, one, Jim, for you: Any thoughts for a question about navigating high yield regionally, about U.S. versus European high yield? I think you touched on this earlier, but can you specifically give some thoughts there?

Cielinski: Yeah, we’ve had a bias to the U.S., but I think with Europe, we see companies that are less levered. You probably better capitalize from a debt to EBITDA perspective. So, I think we’re fairly neutral, is where we are positioned right now. Adam, one of our big fears was an energy crisis in Europe that would really cause a much deeper recession. So, I think as we’ve come through the winter in better shape than anticipated there, we’ve seen outperformance in Europe. I think some of that can probably continue. But I think, like we just heard from Jeremiah, I think focusing on the company seems more important than the region at this stage. So, we’re looking at things on an idiosyncratic basis like that. And then, to the earlier points, I think what we’re hearing from all of you on the panel is some distributions we look at are kind of bimodal. There’s not a central case, a normal distribution of, “Here’s what we think, and if we’re wrong, it can be either direction,” that kind of thing. A lot of these risks are, like you said, binary. Some are kind of bimodal; they’re not perfectly shaped. And some still are normal. And then the idiosyncratic nature of company risk, things like that, as you get into a deeper recession, start to get elevated as well. So, for me, it’s kind of combining all these different shapes of relationships in markets today, where policy response functions, default risk, earning and cash flow risk, all these things are tied together in a way that is really quite tricky, and I think that’s the challenge for 2023.

Hetts: Thanks, Jim. I feel like you closed out better than I could, but we’re going to do one more audience question. And Steve, this one’ll go to you. Also, something that you touched on earlier, you mentioned two different trading blocs – U.S., China, I think, deglobalization and other terms, that’s more of a common headline. The question that came in about China’s reopening and how that impacts inflation, or if it doesn’t. Is the reopening something on your radar? You mentioned two trading blocs, and some of those impacts, especially regarding inflation, was the question.

Cain: Well, I think the initial reaction is definitely the supply chains will free up and inflation will benefit from the reopening of China. Clearly, on the other side, we’ll see a pickup in demand for energy, commodities, and global aggregate demand will benefit from the reopening of China. So, I think there is a period here in which, again, there’s a consensus that the world is splitting into two blocs, that the U.S. and China are in conflict. When everything is priced in and that conflict is assumed by all, be careful that we don’t step back from the edge of that for a while and actually a very different outlook appears. The end of the dragon diplomacy that we’ve seen over the last five years may actually, for a couple of years, soften. So, if that’s true, that will be, I think, very beneficial for our supply chain/inflation scenario, and that definitely will be a positive outcome for everybody, and actually one we should all hope for.

Buckley: I think it’s important to note, when we had the restrictions put in place on high-end semiconductors, fortunately, there hasn’t been an escalation post that, and I think that’s important to note that that was kind of accepted. And we’re watching it closely, but I think that was an important step that we might be in this kind of softening period, and it might not be as bad as people think.

Hetts: Well, we’re about 45 minutes in. I think that we’ll wrap it up there. We covered everything that we had set out to do. So, thanks all the listeners for joining. Thanks to the panelists. And listeners, please don’t hesitate to reach out to your local Janus Henderson representative if you want to hear more of our insights or explore the solutions that we offer to employ some of these insights. Kayla, I’ll hand it back to you to close us out.

Thank you so much. That concludes today’s presentation. Thank you for attending.

(End of Recording)

Converts = Convertible bonds

EBITDA = Earnings before interest, taxes, depreciation and amortization

EMD = Emerging market debt

10-Year Treasury Yield is the interest rate on U.S. Treasury bonds that will mature 10 years from the date of purchase.

Alpha compares risk-adjusted performance relative to an index. Positive alpha means outperformance on a risk-adjusted basis.

Beta measures the volatility of a security or portfolio relative to an index. Less than one means lower volatility than the index; more than one means greater volatility.

Cboe Volatility Index® or VIX® Index shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500® Index options and is a widely used measure of market risk. The VIX Index methodology is the property of Chicago Board of Options Exchange, which is not affiliated with Janus Henderson.

Correlation measures the degree to which two variables move in relation to each other. A value of 1.0 implies movement in parallel, -1.0 implies movement in opposite directions, and 0.0 implies no relationship.

Credit Spread is the difference in yield between securities with similar maturity but different credit quality. Widening spreads generally indicate deteriorating creditworthiness of corporate borrowers, and narrowing indicate improving.

Dividend Yield is the weighted average dividend yield of the securities in the portfolio (including cash). The number is not intended to demonstrate income earned or distributions made by the portfolio.

Quantitative Tightening (QT) is a government monetary policy occasionally used to decrease the money supply by either selling government securities or letting them mature and removing them from its cash balances.

S&P 500® Index reflects U.S. large-cap equity performance and represents broad U.S. equity market performance.

Volatility measures risk using the dispersion of returns for a given investment.


Alternative investments include, but are not limited to, commodities, real estate, currencies, hedging strategies, futures, structured products, and other securities intended to be less correlated to the market. They are typically subject to increased risk and are not suitable for all investors.

Collateralized Loan Obligations (CLOs) are debt securities issued in different tranches, with varying degrees of risk, and backed by an underlying portfolio consisting primarily of below investment grade corporate loans. The return of principal is not guaranteed, and prices may decline if payments are not made timely or credit strength weakens. CLOs are subject to liquidity risk, interest rate risk, credit risk, call risk and the risk of default of the underlying assets.

Commodities (such as oil, metals and agricultural products) and commodity-linked securities are subject to greater volatility and risk and may not be appropriate for all investors. Commodities are speculative and may be affected by factors including market movements, economic and political developments, supply and demand disruptions, weather, disease and embargoes.

Fixed income securities are subject to interest rate, inflation, credit and default risk.  The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa.  The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

High-yield or “junk” bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings.

Mortgage-backed securities (MBS) may be more sensitive to interest rate changes. They are subject to extension risk, where borrowers extend the duration of their mortgages as interest rates rise, and prepayment risk, where borrowers pay off their mortgages earlier as interest rates fall. These risks may reduce returns.

Securitized products, such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.

Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.

U.S. Treasury securities are direct debt obligations issued by the U.S. Government. With government bonds, the investor is a creditor of the government. Treasury Bills and U.S. Government Bonds are guaranteed by the full faith and credit of the United States government, are generally considered to be free of credit risk and typically carry lower yields than other securities.

10-Year Treasury Yield is the interest rate on U.S. Treasury bonds that will mature 10 years from the date of purchase.


Market GPS

2023 Investment Outlook:
Finding the silver lining


These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.


Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.


The information in this article does not qualify as an investment recommendation.


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Jim Cielinski, CFA

Jim Cielinski, CFA

Global Head of Fixed Income

Jeremiah Buckley, CFA

Jeremiah Buckley, CFA

Portfolio Manager

Steve Cain

Steve Cain

Portfolio Manager

Adam Hetts, CFA

Adam Hetts, CFA

Global Head of Portfolio Construction and Strategy

26 Jan 2023
45 minute watch

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